IMF Says Hong Kong Credit Growth Risks Bad Loans Amid Crisis
Hong Kong Chief Executive Donald Tsang
Stephen Yang/Bloomberg
Donald Tsang, chief executive of Hong Kong, warned last week that Hong Kong may see “a couple of quarters of bad times” as Europe’s debt crisis roiled markets.
Donald Tsang, chief executive of Hong Kong, warned last week that Hong Kong may see “a couple of quarters of bad times” as Europe’s debt crisis roiled markets. Photographer: Stephen Yang/Bloomberg
Nov. 8 (Bloomberg) -- Hong Kong Chief Executive Donald Tsang talks about Hong Kong's economy and currency policy. Tsang, speaking with Bloomberg's Sara Eisen, also discusses the outlook for China's growth and yuan. (Source: Bloomberg)
Hong Kong Monetary Authority CEO Norman Chan
Dale de la Rey/Bloomberg
Norman Chan, chief executive officer of the Hong Kong Monetary Authority (HKMA), said that there is scope for the city’s banks to further raise interest rates on demand for loans.
Norman Chan, chief executive officer of the Hong Kong Monetary Authority (HKMA), said that there is scope for the city’s banks to further raise interest rates on demand for loans. Photographer: Dale de la Rey/Bloomberg
Hong Kong’s “rapid” credit growth has increased the risk that banks make bad loans as the city faces a potential recession if the European crisis deepens, the International Monetary Fund said.
“Credit has been growing at an extraordinary pace, particularly for loans in foreign currency,” the IMF said in a report released today. Such growth may “lead to a worsening of average credit quality” and create “strains on bank funding,” it said.
The U.S. Fed’s pledge to keep borrowing costs at near zero through at least mid-2013 and credit tightening in China have spurred loan demand from Chinese companies in Hong Kong, where a currency peg means the city’s interest rates track those in the U.S. Chief Executive Donald Tsang warned last week that there’s a 50 percent chance the global economy will shrink next year and Hong Kong may see “a couple of quarters of bad times” as Europe’s debt crisis roiled markets.
While the development of offshore yuan business is “positive” for the city, growing deposits in the Chinese currency may intensify competition for deposits in other currencies that result in higher funding costs, the IMF said. China needs to raise the convertibility of its capital account to encourage yuan repatriation as the offshore market continues to grow, it said.
Raising Rates
As Hong Kong-dollar loans rose with contracted deposits, the loan-to-deposit ratio in the local currency increased to 87 percent by the end of September from 78 percent a year earlier, Hong Kong Monetary Authority data released on Oct. 31 showed. There is scope for the city’s banks to further raise interest rates on demand for loans, Norman Chan, head of the HKMA said Nov. 4.
The city’s de facto central bank asked lenders in April to reassess their funding plans amid concerns that “unsustainable” credit growth will curb liquidity and cut loan quality. The rising liquidity strain may hurt bank asset quality and limit earnings growth, China International Capital Corporation Ltd. said in a report this month.
The IMF expects Hong Kong’s economy will slow to 4 percent in 2012, down from 5.75 percent this year, on weaker export demand. Should the European crisis worsen and bring a “sudden downside shock” that cuts global growth by 3 percentage points, the city will fall into recession and the city government should prepare to adopt immediate fiscal stimulus such as tax reductions, the fund said.
Cash Handouts
Hong Kong will take “appropriate measures” to stabilize its monetary and banking systems if necessary, HKMA’s Chan said today in a statement in response to the IMF’s report. Financial Secretary John Tsang said the city will act “against any possible adverse events.”
Hong Kong skirted a recession in the third quarter, when the economy expanded 0.1 percent from the previous three months, government data last week showed. Low unemployment and increasing numbers of Chinese tourists boosted consumption even as Europe’s crisis crimped exports.
“Domestic growth is quite strong, the economy appears to be operating above potential,” Nigel Chalk, the IMF’s Washington-based China mission chief, said today via a video teleconference. “From a macro-economic perspective, you don’t see the need for universal transfers” to households via one-off measures including cash handouts and such temporary policies could be discontinued in the upcoming budget, he said.
Inflation Eases
The city will address the needs of the middle class in the budget in February, Donald Tsang said last month after announcing relief measures for low-income families. The government doled out HK$6,000 ($771) in cash to each permanent resident in a budget U-turn in March this year.
Besides weakness in global trade, Hong Kong is grappling with elevated inflation and the risk of a slumping housing market. Consumer-price growth will ease to a range of 4 percent to 5 percent next year on slowdown in global economy and food price gains imported from China, the IMF said.
Residential property prices slid to the lowest in more than six months last week as the threat of recession continues to dent buyer sentiment, after home prices surged to about 70 percent since the start of 2009 on low mortgage rates and an influx of Chinese buyers. The financial secretary Tsang said Oct. 27 he sees “downside” risk in the home market on the chance of a global economic slowdown.
Social Burden
There are signs that the city’s property market may cool, while it’s still early to determine if such a slowdown will persist, the IMF said. The government’s reintroduction of a government-subsidized home plan is appropriate to lessen the social burden on renters and new households that do not yet own a home, according to the report.
Rising property and inflation have led to criticism of the city’s linked exchange rate system, which Hong Kong has maintained since 1983. Proposals to change the peg are “ill- conceived” as that would sacrifice the city’s monetary and financial stability, the IMF said.
To contact the reporter on this story: Sophie Leung in Hong Kong at sleung59@bloomberg.net
To contact the editor responsible for this story: Ken McCallum at kmccallum4@bloomberg.net
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